Friday, March 13, 2015

Why inequality matters



The last twelve months have really been The Year of Inequality. It started with the English translation of Piketty's book and it has taken over the political agenda. Over the last year I've regularly heard too odd critiques of the preoccupation with inequality:

1. Inequality doesn't matter, poverty does
2. Inequality only matters if it comes through corruption, and in that case it's just a symptom

Obviously both have a kernel of truth. Poverty matters a lot. We have been studying the "wealth of nations" for 250 years because poverty is critically important. We also rarely believe that it would be unfair for everyone to earn the same income. That point goes back to Aristotle at least. What matters is illegitimate inequality, and this is the sentiment that the second objection tries to piggy-back on.

However, caring about poverty and corruption does not eliminate the case for concern about inequality that does not arise from corruption in a relatively wealthy society (e.g., most of the inequality Piketty writes about). We care about inequality because (1.) of our sense of fairness, and (2.) the fact that opportunities or capacities are unevenly distributed independent of any additional corruption that may exacerbate inequality further. As I write this it seems like a basic point. It feels a little silly to even make it. But I've seen both of the above objections with such frequency that I feel like I have to.

So does dealing with this sort of inequality violate Aristotle's principle that the worst form of inequality is making unequal things equal (not that we are obligated to care of course)? It may, but it may not. There are two big problems with Aristotle's principle as I see it (I'm almost certainly reinventing the wheel here - I didn't take much philosophy so you can fill in the details if I am). First, I don't see why any ethical significance attaches to natural and/or random endowments of capacity or opportunity (if random shocks are a random draw by Nature, these can be considered together). I should hope this was obvious from about the time the words left Aristotle's mouth. In fact I should hope a couple sentences down he notes this and it just doesn't get quoted as much.

The second reason why applications of Aristotle's principle are tricky is particularly relevant to Piketty and a capitalist economy: these systems are recursive and intergenerational, so one period's outcomes are the next period's opportunities. That's really the whole point of capital of course - it endures through periods of time and is productive in future periods. How do we think about Aristotle's principle in a recursive system? Is redistributing capital "making unequal things equal" or is failing to redistribute capital "making equal things unequal"? This is tricky enough in one generation because you have to distinguish between effort and luck of birth (assuming you agree with my first point that no ethical significance attaches to natural or random endowments of capacity or opportunity and therefore that redistribution in favor of those born into very unlucky circumstances is permissible). It gets very hard indeed when we move beyond one generation, because the choices of parents become the endowments of children.

Poverty obviously matters but a basic sense of fairness justifies caring about this even in a rich, uncorrupt society.

What we do about it of course compounds the difficulties for a number of well understood reasons having to do with behavioral responses.

19 comments:

  1. (1) is empirically indistinguishable from envy. Period. Sorry, this whole enterprise is an intellectualization of a vice, not a virtue.

    I actually don't know what you mean by (2). That inequality *may* beget more inequality? But that isn't a problem independent of (1).

    If you want to justify our sense of fairness (and envy), it comes from the fact that when we evolved, everything was a zero sum game. Things aren't a zero sum game anymore. Insisting on placing value of on these emotions is like insisting on the value of getting tricked by optical illusions.

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  3. The claim that fairness = envy is ludicrous to the point of not meriting any response. Unless, of course, you insist a couple of millennia of political theory is simple bullshit. In which case the hubris in your comment is stunning.

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  4. Fairness can have more than once meaning, sure. What Daniel is articulating that we should condemn that others have more than us even though the wealth or income was not acquired in an unjust way. So yes, I'm okay with equating that with envy.

    The full content of what I said is completely consistent with Hayek's "The Atavism of Social Justice." Or, even more pertinently, Paul Rubin's "Folk Economics:" http://www.jstor.org/discover/10.2307/1061637?sid=21106109301673&uid=2&uid=4

    Sorry, I'm not making shit up here. This is well-known literature at the intersection of political science, economics, and psychology.

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    2. [I have now mis-posted and deleted this twice. Sorry!]

      For some of us being fully consistent with some thing Hayek says is not an argument.

      That there is such a thing as envy and such a thing as fairness and that it is useful to disentangle them is surely correct. That the two are empirically indistinguishable is false and that they are conceptually indistinguishable is ludicrous.

      Imagine that I am in the 1% and decide that due to a sense of fairness I need to transfer some large proportion of my wealth to those in the bottom 1%. (Someone like Peter Singer thinks such things.) In that instance fairness is doing a lot of work and envy is irrelevant. Many of the folks worried about inequality and fairness are not the poor but the reasonably (often very) well off. That I think Bill Gates is absurdly (unjustifiably) wealthy and that some % of his wealth is fair game for redistribution has zero to do with envy.

      As a final aside, it is interesting how easy it is to assume that the poor are viscous and the wealthy virtuous.

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  5. My sympathy for the obviously mentally ill guy that camps out at 21st and L or for the kid of a single mom I talked to on the metro is me being envious?

    People can be envious and it's hard to see how that could be expressed in any way other than disapproval of inequality practically as a matter of the definition of the term "envy". Why would you expect a big difference? Envy is a subset of the broader set that is "concern about inequality". IS that truly all you've got?

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    1. Now we're back to poverty. At worse, "broadly defined poverty."

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    2. *worst

      Also, I'm not moving goalposts. All those recent blog posts by libertarians saying something to the effect of "you're talking about poverty, not inequality, you idiot" would be in response to someone pointing to the problems faced by a mentally ill homeless person or the kid of a single mom and yelling "INEQUALITY!" Control for poverty in your mental model.

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    3. Like I said in the post Ryan, you can't take a concern about poverty and inequality, point out there exists a concern about poverty, and treat that as an argument that there is not a concern about inequality.

      The point of the examples is that they raise concerns because they got a bad draw whereas I got a good draw, and my reaction to that scenario can't be envy and it's not *just* poverty either. The kid of the single mother could very well do fine and live a comfortable non-impoverished life. But it's still a concern if his start kept him from going to college, getting a better job than he did, getting a healthier start, etc.

      Poverty is completely controlled for in the mental model. The concern is that people get dealt a crappy hand that has nothing to do with corruption and that raises fairness concerns.

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    4. Okay, so this gets at what you said regarding "opportunities" and "capacities."

      If it's "capacities," then what you are saying is irrelevant.

      If it's "opportunities," then all of this is about liquidity constraints? Throw out everything you say about the words "inequality." Replace them with "how big of an issue are liquidity constraints for the young poor to get an education and job commensurate with their capacities?" and "what can public policy do about it?" This very quickly becomes much less grandiose in scope. The answer to the first question is probably, "much less than what most people would prefer to believe." The second has several answers but a pretty big one is just "charter schools."

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    5. More fundamentally.

      Situation 1: 18 year old of a modest background has (for examples) $150,000 worth of human capital, can't get a job commensurate with his skills. The 99th percentile owns 50% of wealth in society.

      Situation 2: 18 year old of a modest background has (for examples) $150,000 worth of human capital, can't get a job commensurate with his skills. The 99th percentile owns 90% of wealth in society.

      This is silly.

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  6. That's a wonderful picture, the baby with Piketty's book.

    Inequality matters because (1.) capital endures through time, as you say; and (2.) accumulation requires a source. If wealth accumulates by a skimming that creates poverty, then accumulation destroys the environment it needs to survive, and ultimately destroys itself. Civilizations die by suicide, as Toynbee said.

    I read an old paperback by Heilbroner long ago. In it he said he didn't expect capitalism to last another N years. That's the problem. That's the reason inequality matters. Capitalism is not sustainable because a growing inequality changes the economic environment.

    It has nothing to do with fairness or ethical significance.

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    1. So what was the N?

      What the N was seems to be pretty central to evaluating whether "that's the problem" or not :)

      I do agree that there are political concerns around inequality as well. For a lot of people that's tied up very closely with the idea that the real problem is corruption which is why it didn't come to the fore in my post.

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    2. That's my daughter, btw. I think it's a nice picture too. She was a little under 1 when I took that - now she's almost 18 months.

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    3. and I bet she still hasn't finished it...

      (BTW, I agree its a nice picture).

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  7. I agree inequality matters, but for different reasons. Since the rich consume less of their income than the poor, a rise in inequality causes the savings rate to rise, unless it's offset by rising inventories or debt fueled consumption, neither of which are sustainable and both of which destroy capital. If the savings rate does rise, either consumption must drop, unproductive investment must rise, productive investment must rise, or the savings must be exported. If consumption drops, growth, demand, and unemployment must rise. If unproductive investment increases, it's not sustainable and destroys capital. An increase in productive investment is the ideal scenario, but there are limits to productive investment opportunities in developed countries (by the definition of developed). In the last case of savings being exported, they have to be invested productively and there are usually constraints on the exportation of savings for lots of reasons.
    http://suvysthoughts.blogspot.com/2015/02/economic-effects-of-income-inequality.html

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  8. I should hope this was obvious from about the time the words left Aristotle's mouth. In fact I should hope a couple sentences down he notes this and it just doesn't get quoted as much.

    Actually those words never left Aristotle's mouth. That quote is a (rather crude) paraphrase of Aristotle's thought, popularized in a 1979 book by Laurence Peter. http://en.wikiquote.org/wiki/Aristotle

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